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(March 1, 2015, Oakland, CA) Intentional interference with prospective economic advantage allows recovery for a defendant’s interference with some types of economic relationships. The tort has received little scrutiny since 2003 when the California Supreme Court considered its intent requirement in Korea Supply Company v. Lockeed Martin Corp., 131 Cal.Rptr.2d 29, 29 Cal.4th 1134, 63 P.3d 937 (2003) (specific intent to interfere not required). Prior to Korea Supply, the debate centered mostly on whether, since the tort applies to a wider range of economic relationships than contractual interference, recovery should be limited to defendants whose interference was accomplished with “independently wrongful” conduct.

The tort received renewed attention late last month when Division 8 of the Second District Court of Appeal held in a case of first impression that the lowest bidder on a public works contract could be sued for prospective interference by the next lawful lowest bidder if the bid is won by the payment of unlawfully low wages. Roy Allen Slurry Seal, Inc. v. American Asphalt South, Inc., B255558 (February 20, 2015) resolved the question of whether a bidder for a public contract could enjoy an actionable expectancy. The majority’s holding provoked a strong dissent from Justice Beth Grimes who argued it conflicted with tenets of public contract law. A copy of the case is available here.

Whether a prospective interference claim should be available to losing bidders for public contracts turns on a few different policy concerns: obtaining the lowest price from a capable contractor and ensuring the completion of contracts.

In Roy Allan Slurry Seal, the winning bidder allegedly won approximately 23 contracts in a total of 5 counties for an aggregate of $14.6 million over three years by unlawfully paying below the prevailing wage required for public contracts set forth in Labor Code sections 1770 and 1771. After the plaintiffs sued in five separate counties, the trial courts came out with conflicting rulings on the defendant’s demurrers. The appellate proceedings were consolidated for hearing.

In ruling that second lowest lawful bidders like the plaintiffs could properly state a cause of action, the Second District reasoned it “had a tangible expectancy the contracts would be theirs, an expectation that was thwarted only by” the illegal conduct of the highest bidder. The court expressed special concern that:

no losing bidder could ever sue a competitor for interfering with the bidding process no matter how egregious the misconduct because no economic relationship exists until and unless its bid is accepted.[] It does not require much imagination to envision a contractor who obtains a public works contract by bribery, extortion, or familial connections. At bottom, the intentional interference tort was designed to protect an economic expectancy that showed a reasonable probability of coming into being. A bidder on a public agency contract who in fact submits the lawful lowest bid has such an expectancy, and it should not be thwarted by a competitor’s illegal conduct.

The concerns expressed by the majority have merit. No legitimate interest is served by denying all remedy against a winning bidder whose unlawful conduct ensures the win. Over time, a court’s denial of a remedy to losing bidders for public contracts can have a profoundly important consequence: reduced competition. Specifically, the unlawful winning bidder slowly marginalizes competitors and gains pricing power.

These concerns are palpable from the facts alleged in Roy Allan Slurry Seal. Making a low bid with the expectation that the business can recoup the loss through illegally low wage payments is a risky proposition. The statutes in the Labor Code are especially harsh. They come with an award of attorney’s fees, expedited administrative procedures for relatively quick entries of judgment, penalties, and attorney-general lawsuits, to name just a few incentives imposed on employers in the Labor Code to get wage compliance right.

Because reasonable bidders will not typically risk violations of the Labor Code to undercut the few businesses willing to do so, reasonable bidders can eventually be marginalized or driven out of business entirely by unlawful actors. As lawful bidders lose relevance, the sole remaining unlawful one gains increased pricing clout. Specifically, public entities are allowed to overlook low bids based on some subjective factors, including the “responsibility” of the winning bidder. Whether a bidder is responsible turns in part on whether they have the skills and equipment necessary to complete the task. As the unlawful winning bidder wins more contracts, it acquires more experience and possibly equipment than its routinely losing competitors. As a result, it starts to look more responsible than the bidders it undercuts. Thus, in the long run, it competes with fewer bidders and can even sometimes bid over the now higher bid prices based on its perceived superior responsibility.

Justice Grimes argued in dissent that, since public contract law favors low bids, the majority erred in allowing a prospective interference claim. She explained that in this case it actually favored higher prices, which runs counter to policies of public contract law. In the short term she is correct. Yet, anti-competitive conduct feeds on this short-term outlook. Over the long term, by harming competition, unlawful bidders come into their clout-wielding own.

Justice Grimes also argued that a losing bidder can have no business expectancy in a public contract because, as a matter of law, bidders for public contracts have no expectancy in them. Her argument has some appeal on first blush in that it is bright-lined. Moreover, it ties in nicely with the policies in public contract law of non-liability of a public entity to losing bidders. However, the case at issue did not concern a public entity’s liability and no legitimate policy concern requires neat parallelism between the respective liabilities of a public entity and a winning bidder.

Moreover, one need only observe the conduct of the winning bidder to understand that Justice Grimes is in fact and business practice wrong. Indeed, the unlawful low bidder struts not with a mere business expectancy but rather with an absolute certainty that the contracts belong to it alone.

Losing bidders are in some ways the canaries in the coal mine of illegal contracting: they are the first to suffer when the environment turns foul. It is solidly within the public interest for losing bidders to voice a warning that not all is well. It is equally within the public interest for bad actors to operate under the risk that their profits will be completely undone.

That is not to say that there are not valid counter-vailing concerns. As much as there is a public interest in ensuring the integrity of bidding on public contracts, there is also a public interest in not routinely second-guessing contract awards. Opening winning bidders to easy litigation from competitors arguably threatens the completion of some public projects.

As noted above the Labor Code is rich in fodder to satisfy the independently wrongful conduct element of prospective interference claims. Some of the statutory violations are very technical. Without the element of an existing business relationship as a limiting factor on the tort in bid situations, there is some risk that the tort becomes as broad and technical as the Labor Code itself.

Still, in the vast majority of the cases, this fear should not play out. In the context of a bid for a single public contract, Labor Code violations would occur after the alleged interference. Indeed, the employees work after the bidding is complete. In the single bid situation, it would seem very difficult as a matter of law for the second lowest bidder ever to win.

At the same time, there is no strong public policy to be gained by awarding damages to a low bidder in a single bid because the bad actor has not yet gained clout from its activity. There is a correspondingly reduced incentive for the second lowest bidder to sue. Liability for a single contract is difficult to prove and the gains are usually less substantial.

Moreover, were a losing bidder to sue over merely technical violations of the Labor Code rather than substantive ones like unlawfully low wages, the losing bidder would likely face an uphill battle pleading and proving causation.

In the single bid situations, there exists another, albeit flawed remedy, in the form of ordinary mandate in Code of Civil Procedure section 1085. Such remedy is flawed because, while the government ought to approach such a petition somewhat neutrally, the bidding government entity’s interests in practice are at odds with the public interest in promoting competition. It wants the work completed by the contractor it chooses. The work is not completed by policing the competiveness of a single bid. And, over a widespread geographic area involving multiple public entities or contracts, mandate becomes an expensive and ineffective remedy.

Roy Allan Slurry Seal arose not from a single bid but from a score of them. There is plenty of evidence of past illegally low wage payments sufficient to support the independently wrongful conduct element of the tort. Given the large number of contracts at stake in the case, the millions of dollars at issue, and the palpable risk of reduced competition, a prospective interference claim by a losing bidder appears to be the public’s last defense to a particular brand of harmful public corruption.

John Claassen practices civil litigation from the offices of Claassen, P.C. in Oakland, California. For more information about his firm, please click here. While this blog entry is published for informational purposes, portions of this blog post may constitute "communications" within the meaning of California Rule of Professional Conduct 1-400. Thus, as a possible "Advertisement" it is not intended to constitute legal advice. Similarly, no statement made in this blog post is intended as a guarantee, warranty, or promise about the outcome of any litigation matter taken on by the firm. This Advertisement is not intended for any matter that would require the rendition of legal services outside of the State of California or under the laws of any jurisdiction outside of the State of California. Copyright 2014-15. All rights reserved.